Vishal Sikka, chief executive officer and managing director, Infosys. The company’s March quarter results were disappointing on so many counts that it is surprising its shares fell by only 6% on Friday. Photo: Aniruddha Chowdhury/Mint
Infosys Ltd’s March quarter results were disappointing on so many counts that it is surprising its shares fell by only 6% on Friday. The company’s revenues fell by 0.45% in constant currency terms to $2.208 billion, against the Street’s consensus estimate of a growth of 2-2.5%.
Investors were disappointed when revenue growth of Tata Consultancy Services Ltd (TCS) and Wipro Ltd fell about 100 basis points short of the Street’s expectations.
What’s more, a mid-quarter survey conducted by Infosys of fund managers included a question on capital allocation, leading to expectations of large increase in the company’s payout ratio. While the company did increase the dividend payout ratio to 50% of profits effective 2014-15, it has left its cash hoard of $5 billion untouched. That’s far from generous, even if the payout ratio has increased from 30% two years ago—Accenture Plc pays out as much as 75% of profit to shareholders.
Analysts at Nomura Research wrote in a pre-results note to clients that a cash payout of less than $1.5 billion annually could be taken negatively by the Street. A 50% payout works out to a dividend of around $1 billion in the near future.
One of the reasons Infosys shares hadn’t fallen as much as peers in the correction since early March was high expectations on the capital allocation front. With these hopes now being belied, the stock should give up some of its outperformance. Not surprisingly, TCS shares rose by over 2% on Friday, after having underperformed Infosys by a wide margin in the past year.
Some investors still seem hopeful about Infosys’s prospects, after the company painted a rosy outlook for the future. The company said it expects revenues to grow by 10-12% in constant currency terms in 2015-16. It needs to be noted, however, that thanks to the weak performance in the March quarter, the asking growth rate in each of the next four quarters is between 3.1% and 3.8%. In the past four quarters, the company has grown at an average rate of 1.4% in constant currency terms. According to an analyst with a multinational broker, the target is aggressive.
Three industries— energy, telecom and insurance—which account for about 20% of the company’s revenues, are facing pressures that aren’t likely to disappear quickly. Besides, by the company’s own admission, existing services are facing pricing pressure—of course, it didn’t add that its aggressive stance in the marketplace is leading to a drop in pricing.
Last quarter, average billing rates fell by 1.7% in constant currency terms, on the back of a similar drop in the December quarter. With prices declining, volumes will have to grow at an even higher rate for the company to meet its ambitious target.
The company believes its efforts to invest in new technologies and renew existing ones using technologies such as artificial intelligence will help overcome the above-mentioned challenges. But considering that these are still at a nascent stage, this may be asking for too much.
Infosys also said that it aspires to clock revenues of $20 billion by 2020, up from $8.7 billion currently, and to improve employee productivity by over 50% during the same period. It also aspires to grow its profit margin to 30%, from 26% currently, which will mean outsized profit growth. However, as one analyst puts it—since these are aspirations, no one will be able to hold the company accountable to them.
In any case, investors tend to focus on near-term performance. If Vishal Sikka’s strategies don’t bear visible fruit soon, the Infosys stock could well start underperforming peers, after enjoying a great ride since the time he joined the company.
The writer doesn’t own shares in the above-mentioned companies.
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